Finance minister P Chidambaram will discuss new measures to infuse capital in state-owned banks, including share issuance to employees, when he meets the board of the Reserve Bank of India on March 7. He also plans to discuss United Bank of India’s (UBI) bad loan crisis with RBI Governor Raghuram Rajan at the meeting.
After a three-hour quarterly performance review meeting with chiefs of state-owned banks and financial institutions, Chidambaram said the banks must also infuse part of their earnings as fresh capital. The minister also exhorted public sector banks (PSBs) to effectively deal with rising non-performing assets (NPAs), their biggest challenge.
“These are suggestions, these are not decisions… There is a suggestion that PFRDA and Irda must revisit some of their regulations, which enables pension and insurance funds to be invested in additional Tier I capital, which is a perpetual bond,” he said, asking the banks to focus on profitability.
He added that the Pension Fund Regulatory and Development Authority (PFRDA) has already made changes in regulations to enable purchase of such bonds, and the government is now in talks with the Insurance Regulatory and Development Authority (Irda) to permit insurance funds to buy perpetual bonds.
Further, banks may be allowed to issue shares to their employees to mobilise capital or minority shareholders may be given rights issue to raise funds.
“Even while government infuses capital into state-run banks, the minority shareholder can be given a rights issue of equal proportion to ensure that nobody’s share is diluted but at the same time funds are mobilised from minority shareholders,” Chidambaram said. Banks are required to maintain a capital adequacy ratio of 9 per cent — 1 per cent higher than the global norm of 8 per cent — as per the RBI. On the UBI issue, the minister said it is a “special case”. “UBI issue will be discussed separately when the governor comes here on March 7 and we know the path forward, “ he said.
UBI posted a net loss of Rs 1,238 crore in the three months ended December, during which its gross NPAs soared to Rs 8,546 crore from Rs 2,964 crore at the end of March last year. The bank has recovered Rs 400 crore in cash and has upgraded Rs 800 crore worth of accounts.
NPAs have been reduced by Rs 1,200 crore, he said, adding that a large part of the meeting was focused on bad loans and the steps needed to recover them.